Last updated: March 3, 2015 11:10 am
Petrobras fall from grace roils wider Lat Am debt markets
Vivianne Rodrigues in New York and Joe Leahy in São Paulo
Moody’s decision last week to strip Brazil’s oil company Petrobras of its investment grade status and send it two notches into junk territory triggered a sharp sell-off in the country’s markets and raised the prospect of a broader fallout for investors in Latin American corporate debt.
Rapid growth in the region in the past decade brought a new wave of companies, lenders and investors into debt capital markets as financing needs rose sharply.
- Now, investors are wondering whether Petrobras’ spectacular fall from grace — in the aftermath of a corruption scandal — is an isolated case or whether its woes will also cast a long shadow on the outlook for other larger Latin American corporate borrowers.“There are a lot of bond managers paying close attention to what’s going on with these bonds and what kind of spillover all of this could end up having.”Only Mexico’s Pemex offered more during the same period, or $43.4bn, according to Dealogic.When Petrobras sold $11bn of bonds in May 2013, the largest single sale of corporate debt by an emerging markets company, the offer attracted $50bn worth of orders, with about 30 per cent of the securities being sold to investors based in Asia, Europe and the Middle East. The sell-off has already contributed to weakness in broad Latam bond markets.“Unfortunately, this Petrobras issue has led to contagion in the US asset markets [for Brazilian bonds],” says Clayton Rodrigues, of Bradesco Asset Management in São Paulo.Most investors were favouring the more liquid short-term government bond market, with the focus now on whether President Dilma Rousseff will be able to resolve the company’s problems and put her administration’s finances on track. For most of the past decade, big blow-ups in the Latin American corporate debt market — such as the collapse of Brazil’s billionaire Eike Batista empire and a couple of defaults among Mexican home builders — have been infrequent. Their impact is so localised that any broad sell-off has offered rewards for buyers with a long-term investment horizon.“But markets are impatient and want results immediately. I’m a dedicated investor: I see where spreads are in those bonds and honestly, if my risk budget allows, I may actually consider increasing my exposure.”
- “Some of the challenges faced by Petrobras, Brazil and other Latin American economies is coming from things they can’t control, such as oil prices, the slowdown in China and a stronger dollar,” says Paolo Valle, senior portfolio manager at Manulife Asset Management.
- Still, some investors disagree. Fears of a prolonged sell-off in Brazil and the region’s corporate bonds are not justified, they say.
- If the country could clean up Petrobras and meet its fiscal targets, the upside would be considerable, says Mr Rodrigues. Failure, on the other hand, could condemn Brazil to continued underperformance.
- In Brazil, where domestic corporate debt is held tightly by local banks and fund managers, swings in Petrobras bonds have been less severe than in foreign markets.
- The company accounts for nearly 4 per cent of JPMorgan’s CMBI Index of Latin American corporate debt, which has posted negative total returns of about 0.4 per cent since last July, compared with gains of 0.5 per cent for broad emerging markets corporate debt in the same period, according to JPMorgan data.
- Petrobras still carries investment-grade ratings by Fitch and Standard & Poor’s, but another downgrade could result in further selling as many institutional investors are not allowed to carry junk-rated debt.
- But since then, some of the company’s benchmark bonds have fallen more than 20 per cent, with debt maturing in 2021 hitting a low of 87.66 cents last week after Moody’s downgrade, according to Bloomberg data. Yields on the debt traded as high as 8.03 per cent, from a low of 4.1 per cent in August.
- Petrobras’ investment grade status and higher yields than the ones offered by most of its peers in developed nations meant the company’s bonds found their way to a large number of portfolios, with investors lining up to snatch up the securities at auctions.
- Latin American companies have sold $423.8bn worth of bonds in the US since 2006 (bonds denominated in dollars and issued in the US by overseas companies are known as “Yankee” bonds) with Petrobras alone offering $42.4bn worth of securities.
- “This is a complex situation of a very large company, with bonds in portfolios all over the world, and with the potential to really hurt Latin America’s largest economy,” says Jason Brady, a portfolio manager at Thornburg Asset Management.
- But local bond markets are still small relative to GDP and the most developed segment remains that of government bonds. As a result the US debt capital market, with its ample liquidity and diversified pool of long-term investors, became the top destination for the region’s largest corporate borrowers.
- Copyright The Financial Times Limited 2015.